Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Thursday, 19 January 2012

Eurozone Snap Comment - 19-Jan-12


The farce continues as IMF wishes to raise its war chest to 1 trillion dollars by tapping some of the poorest countries in the world. I half expected to see something on the lines of this when they announced the sum. Lagarde's wish is a little late for Christmas gone by and too early for the next one. Also Santa may not be too happy with European leaders' behaviour in general.
FT makes it quite clear that this proposal is dead on arrival.
"People familiar with discussions on the IMF’s 24-member executive board, representing the fund’s shareholder countries, said the US was the most sceptical about the request. While some big emerging markets such as Brazil and India were more supportive, they emphasised Europe should take the lead in financing its own rescues. The UK took a moderate position, with the eurozone countries the most enthusiastic."

Today's French and Spanish auctions went well as expected. As I've pointed out earlier, it is more to do with the domestic base and ECB's lending freely against unsound collateral than confidence. Spain's confidence in its own ability to issue debt in future is shown by repeating their act of selling more bonds than the auction target (EUR6.61bn vs EUR4.5bn this time). Good tactic - make hay while the sun shines and the market ignores that crumbling housing market.

Spanish banking sector bad loan ratios are now at a 17-year high at 7.51%. And they show no signs of coming down (the October reading was 7.42%). However Spanish banks have been reducing their coverage ratios since the crisis began (because obviously every quarter "the worst is behind us"). And they seem to have been very liberal in marking their real estate assets. The comparison (graph below) between the Spanish house price index and the Irish shows the extent of collapse yet to come (of course this may be avoided as the Chinese are going to start buying beachfront property in Spain any time now). Only a matter of time before some kid in a banks research department calls out that the emperor is naked.



So this is another liquidity enhanced short squeeze. Fade as usual.

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